What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Zhejiang XiaSha Precision Manufacturing (SZSE:001306), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang XiaSha Precision Manufacturing is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = CN¥55m ÷ (CN¥1.8b - CN¥340m) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang XiaSha Precision Manufacturing has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang XiaSha Precision Manufacturing's ROCE against it's prior returns. If you're interested in investigating Zhejiang XiaSha Precision Manufacturing's past further, check out this free graph covering Zhejiang XiaSha Precision Manufacturing's past earnings, revenue and cash flow.

So How Is Zhejiang XiaSha Precision Manufacturing's ROCE Trending?

When we looked at the ROCE trend at Zhejiang XiaSha Precision Manufacturing, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Zhejiang XiaSha Precision Manufacturing has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Zhejiang XiaSha Precision Manufacturing's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang XiaSha Precision Manufacturing. And there could be an opportunity here if other metrics look good too, because the stock has declined 31% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang XiaSha Precision Manufacturing (of which 1 is significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.